by Tim Seymour
We have spent a lot of time in this space discussing emerging markets inflation risks. No question, this is an issue for the asset class — but the pullback also creates value in the bank stocks.
At these levels, Indian, Brazilian, Turkish, South African banks — and even some of the once-frothy Argentine names — look interesting.
Value has returned. In some cases, this is not extraordinary value, but it bears witness to the way the markets have it wrong with this latest hypothesis that inflation creates rate hikes and rate hikes kill banks.
In many cases, net interest margins will actually improve here simply because these banks will have the ability to charge more interest and so squeeze more profit out of their capital. This is already happening.
Russia is a great example of this. Sberbank (SBRBF.PK) is largely funded by retail deposits, which will not necessarily pay higher yields on anything like the same schedule that lending rates will rise.
Likewise, the South African banks will eventually be great buys, simply because of the rate story and the fact that asset yields are already getting priced higher.
Meanwhile, the risks are falling as borrowers with marginal credit quality get pushed out for awhile. This is especially true in Turkey’s (OTCQX:TKGBY)— where, to be fair, rates are falling — and in the case of Sberbank.
As a bonus, the world’s banks hold a vast amount of emerging markets debt, and the global push into this asset class has created big gains for those portfolios. Those gains will eventually spill over into the banking earnings numbers.